SOFR So Far

April 5, 2018 -On Tuesday, April 3rd, the NY Fed began publishing SOFR – a possible replacement for LIBOR – to great interest (at the LSTA, at least). So, the results thus far? As the Fed data shows, SOFR came out of the box at 1.8% on Day One, climbed to 1.83% on Day Two, and then declined to 1.74% on Day Three. A couple of initial observations: First, SOFR is an overnight secured rate, based off Treasury repos. In comparison, according to WSJ, overnight LIBOR – an unsecured rate with credit risk – is 1.7%, below the secured SOFR rate. (That said, i) overnight LIBOR doesn’t necessarily mean that much, and ii) commentators have noted that repo rates have widened as 3-month T-bill issuance has increased.) Second, SOFR has moved a lot in its three-day life. Commentators also note that overnight repos do move around – particularly around quarter-end – but should be smoother when compounded. Finally, there has been more than $800 billion of daily trading volume making up SOFR. This is dramatically more robust than the estimated $500 million of trading underlying 3-month LIBOR, as demonstrated on p. 10 of the ARRC Second Report. The LSTA is the co-chair of the ARRC business loans and CLOs committee. We will continue to watch SOFR and will report back as we learn more in the second week of its life.